Who should file consumption tax returns?

Recent revision of Japanese consumption tax (JCT) rules has some impact on both foreign companies (even located in foreign countries) and Japanese companies.

We have already talked about the impact on foreign companies here, so we are showing the impact on Japanese companies in this article.

Japanese companies?

The definition of Japanese companies include foreign-based companies operating in Japan. So nationality of companies' owner does not matter.

Brief ideas about JCT & recent reform

As JCT is an indirect tax, companies file a tax return and pay JCT to tax offices. JCT is added to the sales price, so actually consumers pay JCT but this is what indirect tax should be. The idea is that companies should file a tax return and pay JCT when they sell their products to someone (consumers and companies). However, Reverse Charge system has been introduced since 1st October 2015, and this revision has an effect on JCT return.

What is 'Reverse Charge'?

Reverse Charge simply means the responsibility for the JCT return moves the seller to the buyer. Thus some transactions made by the seller are not taxed. There are two types of transactions where Reverse Charge is applied.

1.Provision of B2B (Business to Business) digital services by someone in foreign countries.

Why Reverse Charge is required for the above transactions? Because it is unlikely that foreign sellers file JCT return and pay JCT in Japan (of course, they have an obligation to do so though).

Probably many companies use B2B digital service so they should be aware whether Reverse Charge is appilied or not. Under the JCT law, foreign suppliers, dealing with this B2B digital service, are required to tell companies which use the service that Reverse Charge is applied to it. So you may see some notice on an invoice. (If no notice, it does not mean you are not taxed.)

My company needs a JCT return?

Some companies do not need it as there is some exemption rule for small companies. So it depends on your company. But if your company was incorporated in Japan around one year ago, your company may be exempt from JCT return. General JCT exemption rule is simple. If your company's sales during the Base Period is more than JPY 10 million, JCT is taxed so you need a JCT return. Base Period generally means the period two years before the current accounting period. For example, your company was incorporated sometime in 2016 (callendar year is the accounting period). Of course, there was no sales in 2014, so it is exempt from JCT in 2016. And it may be exempt in 2017 as no sales in 2015 (some cases not exempt). The sales in 2016 was JPY 5 million (lower than JPY 10 million), then it may still be exempt in 2018 (some cases not). The sales in 2017 was 11 million so it is not exempt from JCT returns in 2019. This is the simplest example. Actually JCT rule is highly complicated so your company may need to file JCT returns even if the sales in the Base Period is lower than JPY 10 million.

Questions about JCT payment and return

'My company is dealing with digital devices in Japan. We got an invoice and it says JPY 10,000 + 800 (as JCT 8%). The company paid JPY 10,800 so we paid JCT as we paid an invoice. We do not need to think about JCT payment and return any more?'

It sounds like you paid JCT (JPY 800) but you may still have to make JCT payment and returns. The JPY 800 you paid is JCT deduction so not JCT itself. Let's say your company buy digital devices from suppliers and sell them to somebody. You bought a device for JPY 10,800 and sold it to somebody for JPY 32,400, for example (profitable example). You received JPY 32,400 and it includes JCT (JPY 2,400). As mentioned, a seller should file a JCT return and pay JCT, so you need to pay JPY 2,400 to a tax office. JCT is an indirect tax. However, JPY 800 can be deductible so your JCT payment should be JPY 1,600 (2,400-800).

In this case, you need a JCT return and payment. It does not matter how much you paid JCT. You need to file a return and make payment on an annual basis. JCT return and payment should be completed before the due date(within two months after the end of accounting period). If the accounting period is January to December, the due date is the end of February.